Dollar gains on worries over global growth, European banks

U.S. currency falls to lowest level this year against Japanese yen

By

DeborahLevine

WilliamL. Watts

NEW YORK (MarketWatch) -- The dollar and the Japanese yen rose Tuesday, extending gains, adding to investors' desire of safe havens amid worries over global growth prospects, this time stemming from data in China and concerns about the health of European banks.

The dollar extended gains against the euro after an index on consumer confidence fell to the lowest level since March.

"Risk aversion is most definitely the order of the day as more and more people discuss the prospects for a dreaded double-dip recession," said Andrew Wilkinson, senior market analyst at Interactive Brokers.

The dollar index
DXY, +0.63%
which tracks the U.S. unit against six major counterparts, rose to 86.053, up from 85.620 late Monday.

The euro
EURUSD, -0.4731%
fell to $1.2206, down from $1.2292 in North American trading late Monday. Against the yen, the euro fell 1.6% to ¥107.99.

The dollar also fell to the lowest since December against the yen
C_JPY
which tends to be the biggest beneficiary of safe-haven flows when risk aversion is on the rise. The dollar declined to ¥88.50, down from ¥89.39 on Monday.

The dollar extended gains against the euro after the Conference Board's consumer confidence index plummeted to 52.9 in June, from a downwardly revised 62.7 in May. Read about consumer confidence.

"Coupled with other recent indications that the economic recovery is slowing, today's report on confidence provides little reason to expect a meaningful pickup in consumer spending in the near term," said Jim Baird, chief investment strategist at Plante Moran Financial Advisors, which managers $4.5 billion in assets.

Earlier, scrutiny for European banks came amid the looming expiration this week of the European Central Bank's special one-year funding program.

Late Monday, the Financial Times reported that Spanish banks have been lobbying hard for the European Central Bank to take action to cushion the impact of the expiration of the €442 billion ($543 billion) in one-year loans, which were provided at an interest rate of 1%. The central bank doesn't plan to renew the program.

"As they roll well over $500 billion worth of financing from 1-year terms to 3-month terms, the cost these banks pay may add additional stress to the system and this has investors very nervous," said Dan Cook, senior market analyst at IG Markets.

The euro is likely to remain under pressure until Thursday, said strategists at BNP Paribas.

"The ECB is expected to replace one-year liquidity with three-month liquidity. Should the ECB decide to go for a six-month tender it could provide some relief to markets," they wrote.

European equities also declined, following a 4.3% drop by the Shanghai Composite stock index. Asian stocks succumbed to pressure after the Conference Board's April leading indicator for China was revised sharply lower. Read about China's leading indicator.

The yen gained even after Japanese data showed the country's unemployment rate rose in May to a seasonally adjusted 5.2%, up from 5.1% in April and confounding expectations for a drop in joblessness. And Japan's industrial production fell by 0.1% in May from April, according to a separate report. See more on Japan economic data.

"Japan's trade surplus and lack of reliance on international investors to fund the world's largest budget deficit create an idyllic safe haven where investors love to visit when global stress overcomes greed," Wilkinson wrote in a note.

The data will add to pressure on the Bank of Japan to maintain an accommodative monetary policy and keep fiscal policies to combat deflation on the table, wrote Mitul Kotecha, head of global foreign-exchange strategy at Credit Agricole, in a note to clients.

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